New York City: Then & Now

Crain's New York Business began publishing in 1985, the year that Mayor Ed Koch declared the city's fiscal crisis over and BusinessWeek magazine anointed Salomon Brothers “The King of Wall Street.”

New York was about to be reborn as a capital of commerce. The city would be rich again—and, two decades later, so rich that it could emerge from the Great Recession and the global financial crisis having suffered less damage than the rest of the country.

The rebirth of New York played out on the trading floors of Wall Street and inside City Hall, in a remade Times Square, and through the resurgence of both economic and real estate development. Understanding how New York's upward trajectory was ignited and sustained, and the differences between the city's economic peak in 1987 and the latest in 2007, depends on all of these factors.

Still, Wall Street stands apart, not only as the engine of the city's rebirth and the dominant figure on the New York business landscape, but as the singular ingredient that the city can no longer live without, for better and for worse.

Smoother sailing

"We sail in calmer waters,'' Ed Koch proclaimed in 1987, 10 years after he was elected mayor at the nadir of both the city's fiscal crisis and the economic free fall. He had spent the decade slowly, painfully stabilizing the city's finances and rebuilding its citizens' confidence. By 1987, he was prepared to jettison his conservative fiscal straitjacket.

That January, Mr. Koch unveiled a $22.5 billion budget, 67% more than he had spent seven years earlier. Much of the money was being used to rebuild the city's own work force, which now numbered 234,000, some 40,000 more than in 1980. Gains in property tax collections had matched the growth in spending, while the income tax generated more than twice as much revenue as it did at the start of the decade.

More than 400,000 jobs had been regained since 1977, with growth of about 50,000 a year in the mid-1980s. At that pace, it was possible that the city would soon approach the 1969 peak of 3.8 million. City Hall's hiring had helped, of course, but most of the fuel for the economic expansion was supplied by real estate developers and Wall Street.

Designs on development

Few people typified the go-go 1980s more than David and Jean Solomon, who arrived in New York as a young couple with degrees in architecture but little interest in sticking to design.

Mr. Solomon began working as a developer in the 1970s, buying and renovating modest office buildings and residential properties. His wife joined him in the business in the early 1980s. Their first project together was a 600,000-square-foot, 44-story office building on East 49th Street between Fifth and Madison avenues. Others had shunned the site, believing that big office buildings were not successful on narrow side streets.

The Solomons proved the conventional wisdom wrong. With the city growing again, they leased what was known as Tower 49 at top rents and sold it in 1986 for $301 million, a record price. Suddenly, they were in the spotlight.

Confident that their success could be repeated, they began assembling land for three major office buildings with a total of more than 2 million square feet of space. Other builders were quick to follow suit and seize on new federal tax breaks that encouraged speculative construction, although few matched the Solomons' ambition. Seymour Durst, Fisher Brothers, Tishman Speyer Properties, Bruce Eichner and Larry Silverstein all joined the spree, dotting midtown with modern office towers.

The Solomons and their rivals added almost 7 million square feet of space to the market, and their projects helped swell the ranks of construction workers to 118,000 by 1987, from 77,000 at the start of the decade.

The prospect of filling all that space left them unfazed. They saw the chance to attract investment bankers and traders who were outgrowing their offices downtown, plus the lawyers and accountants who were rushing to meet the demand generated by the financial sector's merger deals, underwriting and investment activities.

Wisdom of Salomon

Back in 1977, Wall Street's ranks had been winnowed to 70,000, a decline of 30% during the decade. Those jobs accounted for only 5% of all the wages in the city. And then Salomon Brothers opened the door into a new era for the securities industry.

It was the first significant member of that clubby world of private partnerships to become public, giving it both financial muscle and new aspirations about how much money it could make. A power struggle that ousted members of the founding family in favor of John Gutfreund ushered in a bawdy and profane culture that gave Salomon a razor-sharp edge. It thrived because its historic strength in the bond market allowed it to exploit the actions of the Paul Volcker-led Federal Reserve Board, which first broke inflation with high interest rates and then let those rates fall, fueling an unprecedented boom in the fixed-income markets.

Buck Ennis

Greg David

Salomon's revenues soared by 19% in 1986 alone, to $6.8 billion. Those riches were turned over to its executives, traders and investment bankers. Mr. Gutfreund—both envied and scorned for his industry-leading $3.1 million paycheck—became a fixture on the society pages. A young cynic named Michael Lewis, who later immortalized the era in his classic tale Liar's Poker, took home $90,000 for what he was told was the best performance ever by a second-year bond salesman.

Rivals stole Salomon's talent and copied its strategy, and more firms thrived. The securities industry in the city more than doubled in size in the decade to 160,000. The pay its people received increased sixfold, accounting for almost 13% of all the wages in the city.

New York was prosperous, but not unchallenged.

Corporate flight or fight

Sitting in the office adjacent to Mr. Koch's, Alair Townsend did not see the city sailing through calm waters. A native of upstate Elmira, she'd come to New York from Washington in 1981 to oversee the city's budget, and five years later was put in charge of economic development. She had one overriding mission: Stop corporate flight. The high cost of doing business in New York was a burden that many firms refused to bear any longer, no matter how much the economy improved.

Nine major companies had either abandoned New York entirely in recent years or moved major parts of their operations elsewhere, according to a list published in The New York Times.

“My job was to figure out which jobs could be saved,'' Ms. Townsend recalls, “and to throw myself in front of them.''

She couldn't stop two of the most important companies in the country from departing. Early in 1987, Mobil announced that it would leave for the Washington area. J.C. Penney said a small town outside Dallas named Plano would be a better home for a mass retailer. Crain's New York Business saw the implications in stark terms: “Mobil Corp. and J.C. Penney Co. are fleeing New York, possibly precipitating a crisis in Manhattan real estate,'' was the first paragraph of its story.

For much of that year and into 1988, Ms. Townsend worked behind the scenes as Chase Manhattan Bank considered relocating 5,000 employees to New Jersey. As significant as the economic impact might be, the psychological damage would be far worse. This was the Rockefeller Bank. David Rockefeller, the man who had done as much as anyone to save the city during its fiscal crisis, remained an influential figure here. If Chase was willing to leave, who would stay?

Ms. Townsend's best hope for keeping Chase's jobs in the city was to make a reality of an idea percolating across the East River in downtown Brooklyn, where she, the borough president, the chief executive of Brooklyn Union Gas and developer Bruce Ratner had conceived of a new office park. If built, MetroTech would offer a less costly alternative for relocating Manhattan jobs and, with tax breaks from the city and the state, would counter the cheaper rents and money-saving incentives available across the Hudson.

For a while, the cause looked hopeless, but a September Wall Street Journal story reporting that Chase had decided to move to Jersey mobilized political and civic leaders. The mayor lobbied Chase officials furiously, and the city scrounged up every dollar it could for an incentive plan to narrow New Jersey's cost advantage.

In early November, Chase announced that it would stay, promising to put 5,000 workers at MetroTech in return for $235 million in tax breaks and energy subsidies. The Chase jobs allowed for the development of MetroTech, the crucial project that jump-started Brooklyn's own revival. But, tiring of chasing companies like Chase, Ms. Townsend resigned at the end of the year to become publisher of Crain's New York Business, leaving what seemed to be never-ending corporate-relocation battles to her successor.

A broken window

Three miles uptown from the deputy mayor's office, Carl Weisbrod looked in vain for the improving city that others trumpeted. A native New Yorker educated at Cornell, Mr. Weisbrod was in charge of the Times Square Redevelopment Project. His job was to lead a revitalization of the area by rebuilding it with office towers, hotels and retail developments. In 1987, his efforts appeared to be at a standstill.

Mr. Weisbrod had been immersed in the Times Square problem since the late 1970s, in jobs ranging from law enforcement to economic development. If Times Square was a window on the soul of the city, as he liked to say, New York remained mired in decadence.

Only a few years earlier, the cops set up barricades on Eighth Avenue to separate the prostitutes from the theatergoers. Surveys of Times Square showed that 90% of the people traveling through the area were male, a sign of a dangerous neighborhood; many of them were headed to its 22 pornographic outlets. More than 200 police officers were assigned to two blocks in the heart of 42nd Street, yet crime was rampant. The two subway stations there ranked No. 1 and No. 2 for crime.

While office construction boomed just a few blocks away, the ambitious Times Square plan was paralyzed by lawsuits from landlords unwilling to give up their fast-food outlets, hole-in-the-wall stores and sex shops.

Bloomberg gives a bump

Twenty years later, Michael Bloomberg, the businessman's mayor, provided a startling statistic that illustrated how strong the local economy had become: Tax revenues for the fiscal year ending in June 2007 would be $2 billion more than he had predicted just two months earlier, and he would end the year with a unexpected $4 billion surplus to use in the next year.

It had been a tumultuous two decades, with two steep recessions and two expansive economic recoveries, each one more robust than the last. The year 2007 would show just how wealthy New York had become.

“New Yorkers have every reason to be happy,'' Mr. Bloomberg said at City Hall.

The budget adopted several months later topped $60 billion, three times what Mr. Koch had spent in the mid-1980s and a 50% increase over the financial plan that Mr. Bloomberg had inherited from Rudy Giuliani when he was elected in 2001. More than 280,000 workers called him their boss—the highest total in decades.

A man, a plan: the Olympics

Nearby, in the Wall Street-style, open-plan bullpen that the mayor had brought to City Hall, Mr. Bloomberg's deputy mayor for economic development was busy remaking the city.

Daniel Doctoroff, a Midwesterner who had made a name for himself on Wall Street and in the private equity business, had joined the administration primarily to continue his crusade to bring the 2012 Olympic Games to New York, since his plan would require development in every borough.

The Olympic effort failed when London won the games in 2005, but Mr. Doctoroff recovered from his bitter defeat, helped by a solo bicycle ride through the Andes in Chile and Argentina, and picked up the task of remaking the city.

Even without the Olympics as a rationale, he made remarkable progress. At the end of 2006, he conceived of a way for the city to finance a subway-line extension to Hudson Yards on the West Side, where he envisioned a multibillion-dollar residential and commercial neighborhood. Behind the scenes, he orchestrated the approval of a massive mixed-used project at Atlantic Yards in Brooklyn, anchored by an arena for the New Jersey Nets basketball team.

He laid plans for new baseball stadiums for both the Yankees in the Bronx and the Mets in Queens. He viewed the Mets' stadium as handy leverage to tackle the rebuilding of the adjacent industrial tract called Willets Point, known for its auto repair facilities, its pollution and its ability to defeat anyone with designs on the area, including the legendary Robert Moses. Some of Mr. Doctoroff's aides also envisioned a rebirth for the deteriorated Coney Island beach and amusement district in Brooklyn.

Preventing corporate flight did not appear anywhere on Mr. Doctoroff's priority list. He and his boss, both products of Wall Street, argued that New York was so attractive that it could be successfully positioned as a premium location that not everyone could afford.

They had reason to think so. Unlike Chase back in 1987, financial services companies didn't care much about costs. In 2004, Goldman Sachs built a 40-story office building in Jersey City, the tallest in the Garden State, where it planned to move its equity sales and trading operations. Come relocation time, the traders simply said no; they weren't going across the river. Goldman wound up leaving the building virtually empty for years.

Crowds at the crossroads

In Times Square, Mr. Weisbrod's successor didn't need to worry about prostitution or muggings or porn shops. Tim Tompkins' biggest problem as head of the Times Square Alliance in 2007 was the number of complaints he received that the Crossroads of the World was simply too crowded.

Gleaming new office towers had realized the vision of the Times Square redevelopment plan, luring a roster of famous companies—ranging from media giants Condé Nast and Reuters to financial powerhouses Morgan Stanley and Nasdaq to accounting firm Ernst & Young—and adding 200,000 area jobs.

Crime in the district plunged to fewer than 100 violent incidents a year.

Tourism was so vibrant that the area's 15,000 hotel rooms, more than in all of Philadelphia, generated $1.6 billion in revenue. Broadway theaters' seats were filled, with ticket sales growing 75% over 1987 levels, to 12.3 million.

Real estate developers were far bolder than their 1980s predecessors. Jerry Speyer had spent the decade positioning Tishman Speyer as the city's foremost real estate firm by acquiring iconic properties such as Rockefeller Center and the Chrysler Building. In 2006, he bid an eye-popping $5.4 billion for the East Side apartment complex called Stuyvesant Town/Peter Cooper Village, sure that the booming economy would allow him to raise rents at what had been a middle-class enclave.

In 2007, Mr. Speyer lured Morgan Stanley to be his partner in a $1 billion bid for Mr. Doctoroff's Hudson Yards, with the idea that the securities firm would move its headquarters there. He won a fierce five-way competition for the site.

Mr. Speyer's triumphs would be fleeting, but at the time, they seemed breathtaking.

To Goldman go the spoils

On Wall Street, Goldman Sachs claimed the crown once worn by Salomon Brothers. Goldman had long dominated the mergers-and-acquisitions business, for which most of the fees it earned were pure profit. The last of the major security firms to go public—in 1999—it put its new capital in the hands of its traders, whose bets on the market turned out to be far savvier than those of anyone else.

Goldman was more profitable than Salomon and paid its people more spectacularly than anyone could have imagined two decades earlier. Adjusted for inflation, Salomon's capital in 1986 was $7 billion; Goldman's capital hit $42 billion in 2007. Goldman Chief Executive Lloyd Blankfein's salary and bonus in 2007 totaled $68 million, more than nine times what Salomon's Mr. Gutfreund made in 1987, after adjusting for inflation. The average compensation for someone working on Wall Street passed $400,000; the $90,000 that second-year bond salesman Michael Lewis was paid in 1986 would have translated into millions.

A failure to diversify

New Yorkers knew Wall Street was the most important part of the economy, but they convinced themselves that the economic base had diversified: Tourism was thriving, the media industry had again coalesced in New York, colleges and universities were expanding and bringing in thousands of students from the rest of the country, and the broader education and health care sectors had grown so large that they represented the biggest sector when measured by number of jobs.

It was all true, except those areas didn't make the city rich; Wall Street did. If the city had diversified successfully, Wall Street would have accounted for a smaller percentage of its income; instead, the sector had grown.

For most of the late 1990s and the early years of the new century, Wall Street had accounted for roughly 5% of the jobs and 20% of the income in the city. In 2007, securities industry wages and bonuses represented a record 28% of the total—an astounding number, given that the sector continued to account for only 5% of the jobs. Its average wage was six times that for the rest of the economy. The state comptroller calculated that each Wall Street job produced two additional jobs in the city and another 1.2 jobs elsewhere, primarily in New York's suburbs.

One in every five dollars in tax revenue collected by the state came directly from taxes on securities firms' profits and the enormous salaries of its workers. The figure for the city crept past 10%.

Law firms, accounting firms, developers and nonprofits focused their attention on Wall Street even more intently than before.

Even as the financial crisis unfolded in 2008, New York Public Library President Paul LeClerc rose at the annual Lions fundraising dinner to thank the six men and women who had served on the steering committee for the event, which raised over $2.5 million.

“Their contributions paid all the costs,'' he told the several hundred people dining in the famous Reading Room, “so the money all the rest of you gave went entirely to the library.”

Five of the six had made their money on Wall Street, including Donald Marron of Paine Webber and Felix Rohatyn, an investment banker who was also one of the most important players in saving the city in the 1970s. The dinner came only months after The Blackstone Group's Stephen Schwarzman (fresh from an IPO of the firm) promised to give the library $100 million toward a $1 billion expansion.

Forgone opportunities

The financial crisis and the Great Recession, which hit New York in 2008, plunged the city into its third downturn of the past quarter-century. Amid fears that a catastrophe on the order of the Great Depression was possible, the heyday of the securities industry appeared to be over.

Securities firm Bear Stearns was on the brink of failure in March 2008 when a government-orchestrated bailout folded it into J.P. Morgan Chase. A little more than six months later, a crisis became a panic.

Lehman Brothers failed, and a desperate Merrill Lynch sold itself to Bank of America the same weekend. AIG received the first installment of what would be hundreds of billions of dollars in government money to keep it from going bankrupt. The strongest securities firms—Goldman Sachs and Morgan Stanley—turned themselves into banks overnight so they could be more easily protected by the federal government. Wall Street seemed to implode.

Economists estimated that the city's financial sector could shrink by as much as a third. They foresaw more firms going out of business and regulatory reforms that would radically scale back the bonus-based compensation levels first set at Salomon Brothers in the 1980s.

Instead, the government injected enough capital into the country's banks to stabilize New York's key financial institutions. When the Federal Reserve Board drove interest rates for borrowing by such firms down to zero, Wall Street interest expenses fell by 80% and profits tripled to more than $60 billion, three times the 2007 record. Bonuses were back, too, estimated by the state comptroller at $20 billion for 2009.

Changes had occurred, however. The bonus pool was only the fourth-largest on record, and much of it was paid in restricted stock, which could neither be spent by the recipients nor taxed by the state or the city. And Wall Street firms weren't hiring, because the profits weren't a result of booming business, and because they feared that rising interest rates would sharply reduce their earnings in the future.

But make no mistake: While the nation buckled during the Great Recession, the downturn that New York experienced was the mildest in decades, excluding the small dip in the 1980s. Overall job losses totaled 175,000; the damage to the city in percentage terms was about half that suffered by the nation.

The Street's eternal lure

In the early stages of the financial crisis, when Wall Street's very survival was in doubt, politicians, policy wonks and even businesspeople demanded that the city somehow diversify its economy.

Mr. Bloomberg launched scores of initiatives to do just that, including programs to turn laid-off traders and bankers into entrepreneurs, a plan to reinvent the media industry, and incubators for tech and fashion companies. None offered much scale, because breadth seemed to be the best political strategy in an election year and because the city's declining tax revenues meant there really wasn't much cash available.

The Center for an Urban Future, a Manhattan-based think tank, became the foremost local advocate of a strategy centered on the “creative economy,'' with an emphasis on industries such as fashion and furniture design, advertising, arts and media. It emphasized the role that businesses owned by immigrants could play and pointed to opportunities in technology fields.

The potential offered by the green economy won support from the Partnership for New York City, a big business advocate, and the band of stalwarts who had labored without success to stem the loss of manufacturing jobs.

Meanwhile, unions and liberal politicians—arguing that most city families had seen their income stagnate—started the quest for a “living wage” law that would set a higher pay floor for jobs in the retail and service sectors.

All these efforts face a single overriding obstacle: As long as Wall Street is thriving, business will gravitate to it. Developers will build office towers for financial services firms because they will pay the highest rents. The best talent will be drawn to the sector because of its outsize bonuses. Accountants and law firms and nonprofits will all seek to bask in its wealth.

And that makes it harder for just about everyone else in New York. Costs keep rising, making it exceedingly difficult for other industries to secure space, talent and other resources.

Today, New York is moving into another economic cycle, as it did in 1985, 1993 and 2003. No one would say that the waters are calm, and too many ignore the fundamental truism about the city: Its fortunes remain dependent on Wall Street and Wall Street alone.